Beneficial variations to an employment contract held to be void where the principal reason is a TUPE transfer

Beneficial variations to an employment contract held to be void where the principal reason is a TUPE transfer

Beneficial variations to an employment contract held to be void where the principal reason is a TUPE

In the recent case of Ferguson & Ors v Astrea Asset Management Limited, the Employment Appeal Tribunal (‘EAT’) held that both beneficial and adverse variations to the employment contract of a transferring employee are void under regulation 4(4) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’) if the sole or principal reason for such variation is the transfer itself. Previously only less favourable changes to contracts have been held to be void in such circumstances.

Background

The claimants were both directors and employees of Lancer Property Asset Management Ltd (‘LPAM’). In September 2016, LPAM were given 12 months’ notice of termination in respect of their only contract for estate management services. LPAM were informed that Astrea Asset Management Ltd (‘AAM’) would be the new provider of the estate management services from September 2017. The change in provider of estate management services was a service provision change for the purposes of TUPE.

Prior to the transfer of their employment from LPAM to AAM, the claimants made a number of variations to their existing employment contracts. These variations were designed to compensate each director for their anticipated loss of shareholder dividends as a result of the transfer to AAM and, broadly speaking, the changes included:

  • Salary increases
  • Guaranteed bonus payments
  • New termination payments and
  • A 24 month notice period

In September 2017 AAM took over the management of the estate and the claimants’ employment transferred to AAM. AAM dismissed the directors for gross misconduct and the claimants brought claims against AAM for unfair dismissal and contractual termination payments, based on their varied employment contracts.

The decision

In the first instance, the Employment Tribunal (‘ET’) held that the pre-transfer variations to the directors’ employment contracts were void under regulation 4(4) of TUPE. The judge found that the directors had dishonestly awarded themselves benefits at the expense of AAM following the transfer, thus taking undue advantage of TUPE. The directors appealed on the basis that regulation 4(4) should only apply in situations where the changes to the employment contract are adverse to employees.

In upholding the decision of the ET, the EAT held that all contract variations by reason of a TUPE transfer are void, regardless of whether they are adverse or beneficial to the employees. The EAT indicated that whether a contractual change is adverse or beneficial can be considered subjective, with the employee potentially wishing to change his/her mind at a later stage.

Comments

This decision was perhaps surprisingly but understandable given the claimants had deliberately changed their contracts so that they would benefit from far more favourable terms following the TUPE transfer and they had effectively tried to saddle the new service provider with these terms. 

New service providers will therefore no doubt welcome this decision as providing useful clarity that they may be able to challenge changes made to employees’ contracts before the transfer as being void.

However, the situation is arguably quite different where the new service provider or buyer (the transferee) offers the transferring employees more favourable terms following the transfer and it is questionable whether it should be possible for the transferee to be able to challenge these changes as being void. We will have to wait to see if, in future cases, a distinction is drawn between the very different scenario where the changes are made by the transferee after the transfer.

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